Limited Liability Companies (LLCs) are popular business structures because they combine the asset protection benefits of a corporation with the simplicity and tax advantages of a sole proprietorship or partnership. One of the many benefits of forming an LLC is that it requires very little ongoing maintenance or filing obligations.
However, you still need to go through certain formal steps to legally create LLC. This is unlike a sole proprietorship or partnership because those entities come into existence without any official filings. Thankfully, establishing an LLC is much easier than a corporation.
Establishing an LLC: The Basics
Each state varies slightly on how to create your business entity. Nonetheless, the process is remarkably similar throughout the United States. That means that there are online services and generalized forms you can use to make the filing process even easier. However, some of these services are too generic, and you may benefit from the knowledge and experience of a professional. This is particularly true if your LLC is going to have several members or any outside investors.
Before You Start…
Before you even start the legal formation process, you need to answer a few questions first. Knowing this information ahead of time will make the process run much more smoothly.
Establishing a Name for Your LLC
Before you can get the filing process started, you must settle on a name that will work well for your business. This is often an extremely personal decision that will vary depending on your industry, geographical area, or other unique circumstances that apply to you and your business.
The important thing to remember is that the name must be one-of-a-kind. The uniqueness of your name not only helps your business thrive but is also required from a legal perspective. The name for your LLC is similar to a license plate—no one else can have the same name in your state.
There are some additional considerations you may want to think about as well.
- The name usually needs to end with LLC or limited liability company.
- You can do a search online in most states to determine which businesses have names similar to names you are considering.
- State law sometimes restricts what type of words you can use in your business name. For example, you generally cannot use the terms “bank” or “trustee” in your business name, and your name should not include an obscenity.
- You can do an online trademark search by visiting the United States Patent and Trademark Office website.
- You may want to determine whether your potential business name has a similar domain name available so you can create a website.
- You may also be able to establish a “DBA” or “doing business as” name as well.
You have a lot to consider when you are choosing an LLC name. You should spend some time thinking about your business name as it could be with you for years to come.
Keep in mind that you should not start making sales material or signs with your name until your state approves it. Having to re-create promotional materials with a different name can be expensive and time-consuming.
Deciding Where to Organize
Many people automatically assume that they must organize their LLC in their place of residence. While this may be the easiest path, it is not technically necessary. You can take extra steps to organize your LLC in any state you choose. For example, if you are forming a one-member LLC and you want the additional asset protection benefits that Wyoming provides, you can decide to organize your LLC in that state.
Nonetheless, it is often easiest to form an LLC in the state in which the business will operate. It is also more cost-effective as well. When you register with another state, you must file required reports, pay taxes, and satisfy any other legal requirements as well. If you have a “local” business, it may not make sense to organize in another state.
Prepare the Operating Agreement
The operating agreement for the LLC will set out the rights and responsibilities of the members and any other key information regarding ownership. Obviously, if you have a single-member LLC, this operating agreement may be simple. However, if you have several members of your LLC, creating this agreement could be more complicated. Starting the conversation before you initiate the formation process can be extremely helpful.
Although you are not legally required to have an operating agreement for an LLC in many states, it is still a good idea. Only a few states require you to have an operating agreement, and no state requires you to file them. Nonetheless, it is really the signing of the operating agreement that actually “forms” the LLC for asset protection purposes.
You may need to consider things like:
- Voting rights
- Profit and loss distributions
- Capital contributions
- Penalties and remedies for violation of the agreement
- Number of officers
- Removing officers
- Procedures for meetings
- Proceedings for dissolution
Many online services offer simple operating agreements that you can tweak. Again, however, it may be a good idea to speak with a professional to create an agreement that will fit your needs perfectly.
The Formation Process
Forming an LLC from a legal perspective is straightforward. It only has four steps.
1. File an application with the state.
The application is called the “Articles of Organization” in most states. You should have your name picked out and ready to go. LLC filing fees vary by state, but they are often in the range of around $50 to a few hundred dollars.
As long as your business name meets the requirements, then the state should approve your application and you will be ready to move on to step two.
2. Get an EIN Number.
You should get an employee identification number from the federal government. You use this number for tax purposes.
3. Finalize and sign your operating agreement.
Once you have settled on your name and your EIN number is ready, you can put the finishing touches on your operating agreement and execute it. Only California, New York, Missouri, Maine, and Delaware require your LLC to have an operating agreement. However, some states will allow the agreement to be oral, even if it is necessary. Keep in mind, however, that if you want asset protection, you need to have an operating agreement for your LLC.
4. Fund the LLC.
The last step is to put funds or property into the LLC. You should get a bank account for the LLC and take action to move capital or real estate around as necessary.
Getting Formation Right
Many people make mistakes in forming an LLC, and those errors end up compromising the asset protections of the LLC or cause other legal issues. Learning more about LLCs can help you avoid these pitfalls. The extensive resources available in the Protect Wealth Academy video library can be extremely helpful, particularly if you are just getting started. Sign up for free membership now.